A new report from Fitch Ratings says an influx of real-estate owned (REO) properties has created a dilemma for residential mortgage-backed securities (RMBS) servicers who are forced to maintain the properties and who are at-risk of losing money because of lost values and a lagging real estate market.

“Foreclosure costs and other carrying costs and expenses associated with defaulted mortgage loans play a meaningful role in the determination of expected loss severity,” said Senior Director Mary Kelsch. “Additionally, they affect the analysis conducted to determine the sustainability of rating levels for existing transactions.”
According to Fitch’s study on the subject, REO volumes grew 441-percent between 2005 and 2007 for non-agency RMBS. Fitch says, “This rapid rise is leading to escalating loss severities, especially on subprime assets, which jumped to more than 54-percent for the 12-month period ended May 2008 and is likely to increase.”
Fitch predicts average loss severities of 60-percent for vintage subprime RMBS, according to the report.